PRIIPs (Level 2/3)

In mid-2012, the European Commission proposed a regulation to boost consumer confidence in the financial sector by making information about structured products more comparable and understandable via a standardised key information document (or “KID”). Consumers should be able to compare financial investments and understand what they invest in. To help them do this, a Regulation on Packaged Retail and Insurance-based Investment Products (“PRIIPs”) was approved in April 2014. The new European rules require product manufacturers to draft a short information document which must be given to consumers before they invest.

The Commission initiated the Level 2 process in July 2014 with a request to EIOPA for technical advice on possible delegated acts. In November, the European Insurance and Occupational Pensions Authority (EIOPA), with its sister European Supervisory Authorities, the European Banking Association (EBA) and the European Securities and Markets Authority (ESMA), issued a discussion paper on draft Regulatory Technical Standards via the European Supervisory Authorities (ESA) Joint Committee.

Finance Watch argued intensively from late 2012 to April 2014 for a wider scope and warning label, among other things. We published a blog article on PRIIPs in December 2012 and we organised a Webinar in January 2013 in order to explain what PRIIPs was all about. We stepped up these efforts at the end of 2013 during the Parliament compromise meetings and in early 2014 trilogues, against the risk that key elements could be lost as the deadline for the end of the Parliamentary term approached. After highly-contested negotiations, the inter-institutional agreement reflected several wins for consumers and Finance Watch issued a press release on 1 April 2014 to acknowledge them and commit to protecting them during the Level 2 process. This formally started in November 2014 with the first Discussion Paper on the first set of Regulatory Technical Standards.

Finance Watch believes that retail investors should not be offered unsuitable investment products. We made several recommendations for the KID:

• enlarging the scope so that packaged products, insurance products, pension products, and even shares and bonds would require a KID;

• introducing a health warning (“complexity alert”) to reduce miss-selling cases and encourage more suitably-designed products. The purpose of the health warning is to alert retail investors when structured products embed features known to have detrimental effects;

• ensuring that the underlying methodology and disclosure format of the summary risk indicator enable retail investors to understand the risks attached to the product;

• improving disclosure of fee structures. Fees can be disclosed transparently or embedded in the product, in which case they are not paid upfront but translate into lower potential returns, and the investor is never aware of them; and

• summarising in one sentence the implicit view taken by an investor purchasing the product. The purpose is to ensure that investors fully understand the market view that they are taking.

Research shows that retail investors are far from rational when it comes to buying investment products: their decisions are often affected by cognitive and emotional biases and they rely a lot on advice from salespeople who themselves do not always understand the risks in the products they sell.

A properly implemented KID should help consumers to understand the risks and costs of investment products and avoid products that are unsuitable for them.